WoW! Gold's Wall of Worry

Gold is grinding out a wall of worry that began construction out of a natural
unwinding of the momentum that came in during the acute phase of the Euro
crisis. More bricks were added weekly by various luminaries calling bearish;
the most recent being Buffett's right hand man, Charlie Munger: "Gold is a
great thing to sew into your garments if you're a Jewish family in Vienna
in 1939 but civilized people don't buy gold - they invest in productive businesses."

The Munger quote was forwarded by a subscriber as was another piece by an
analyst extrapolating George Lindsay's work to forecast a coming "Thelma & Louise
moment" (as in cliff dive) for gold. Add to the list an analyst calling 'buy'
on US stocks and 'sell' on gold (after the Au-SPX ratio has made a long consolidation
to support) and the first few minutes of this BNN interview with respected
geologist Brent Cook http://watch.bnn.ca/
- clip671131

("we're going to see some real destruction across the board in the junior
sector") and we can see the makings of some nasty sentiment that is opposite
the over bullish condition we noted was so dangerous last summer.

With the methods I use, timing is applied to the intermediate swings and on
this swing the sentiment backdrop is now pervasively bearish. That means that
the conditions are right for a bullish setup, although as you will see in
this week's report, the technical situation remains far from resolved in gold,
and still negative in the miners.

Here is a little illustration of the events pre and post the Euro panic blow
off compliments of the Au-SPX ratio chart.

I do not mean to make light of the events in play, but I have seen too often
in my years of market management the tendency for analysis and commentary
to come out in justification of whatever trend happens to be in play. Credit
to Buffett and Roubini, they always hate the idea of gold and what it represents.
Gartman is just following his interpretation of chart signals. No problem
there either. He is only notable because he is widely followed by a lot of
big entities with the ability to move markets.

Then came the last two gentlemen (among many others), making proclamations
that it is time to buy stocks and shun gold. These high-risk statements are
being made just as the relic is settling down into a support zone vs. the
S&P 500 after an intermediate-term bullish-looking consolidation of last
summer's excess.

Interlude on Deflation: What If?

Let me interject within my own commentary for a moment by stating that if
US policy makers stand on the verge of changing policies designed to promote
inflation, then the gold bull market would likely be over; stopped dead in
its tracks. It is debatable as to how the above chart would react, because
many companies (esp. financials) in the S&P 500 benefit from the policies
of interest rate manipulation, debt monetization and money printing out of
nowhere. So the SPX could still decline faster than gold.

But gold's bull market in nominal terms would be cooked as a real deflation
of the massive credit bubble that has been carried forward would be undeniable.
This bubble began with mortgage related credit and now has morphed into the
credit extended to Uncle Sam. In fact Uncle Sam, already out on an un-payable
limb, is basically setting the terms of his own credit with the help of the
Federal Reserve. That is one of the scariest things imaginable from a monetary
standpoint.

So if Uncle Sam aborts this modus operandi (Wimpy: "I'll gladly pay you Tuesday
for a hamburger today"), or if the people force him to do so then it is time
to button everything down and prepare for 'Prechter time'. EWI has been out
in the wilderness for years, foretelling the hell that would be an undeniable
deflationary unwinding of credit.

As I have noted several times over the years, Robert
Prechter is one of my primary influences. Biiwii.com and NFTRH are
not gold bug services. In fact, it has been very difficult at times for
me personally to continue to move forward with inflationary themes over
the last 10 years with Prechter in my ear making so much sense.

So, is the US government going to stop eating free hamburgers? Is the government
going to stop devouring whole barbequed pigs at a single sitting? Is the government
going to get itself under control?

Or is the government going to go forward as is, enabled by a Federal Reserve
that has taken to manipulating the government's own debt in search of favorable
outcomes in a presidential election year? Maybe here in the midst of an agonizing
time for the tattered gold 'community' it would be productive to think about
a setup that is settling in; one that sees no signs of inflationary 'price'
pressure (was that crude oil I saw getting hammered at the end of last week?),
and an economy starting to decelerate.

There is one main reason to be fundamentally bullish gold, and that is due
to pressure on policy makers to compromise currency in the name of inflationary
growth.

Back on Topic - WoW

projected the low 1600's with the potential for the low 1500's about 7 months
ago and has been managing the EMA 70 (currently 1588) since the December low
marked it as an important support level. Those objectives are in the books.

The weekly chart shows a Symmetrical Triangle, which is a bullish 'continuation'
pattern. MACD is thoroughly drained of momentum but it is triggered down (recall
that it is and has been triggered down on a monthly chart for some time now)
which means momentum is still going in the 'wrong' direction.

Since Stockcharts.com defaults to log scale charts (as opposed to the linear
scale I usually use because I feel they show a more 'real' picture) and many
chartists use log, let's review above what they are seeing. The trend line
is broken out of 2008 (this happens to all trends eventually) and there is
another, shorter term Symmetrical Triangle in play. It does not change the
analysis. The Triangle or a 'higher low' to the December low must hold for
the bullish technical case to remain on track.

I am supposed to be bearish. Everybody says so. And indeed NFTRH

would have no choice but to be bearish on the 'price' of gold if the Symmetrical
Triangle and the weekly EMA 70 are violated.

Perhaps some people find this type of plodding analysis unacceptable. But
I find that it pays not to write something up as having happened (in the face
of everyone telling me it is going to happen) until it, well... happens.

Perhaps the Sym-Tri is patently obvious and it is just a matter of time before
it breaks down. Indeed, current analysis certainly allows for a breakdown
because current analysis as of last week's 'jobs' report on the back of previous
economic reports, implies a lurch toward economic contraction. And in an economy
built on inflationary policy, economic contractions have a nasty habit of
turning into deflationary episodes.

The play we are working is not one where gold and USD rise to the heavens
during a deflationary episode. It is one where Uncle Buck benefits on his
own for a time as gold potentially declines but out performs most assets.
This is the RPG (real price of gold).

Subscribers and blog readers have probably noted my lack of patience with
authoritative figures out there micro managing the nominal price of gold.
That is because they did the same in 2008, scaring many people out of position,
only to see gold double. But also, it is because the gold mining fundamental
case depends on a rising RPG, and the RPG is not dependent on a rising 'NPG',
or nominal price of gold. It is dependent upon what happens on the economic
counter-cycle, like what appears to be setting up now in the economy. This
is when gold out performs other markets and tangible assets.

That is the bigger picture, but the here and now is another matter and it
is near time now to leave this rambling segment and get on to some analysis.
I'll leave you with some words from Mark Hulbert http://is.gd/vjD8hH,
a rare member of the mainstream media who I have found to be helpful throughout
the gold bull market and the various Walls of Worry that have been erected
over its lifespan:

"While bullion's listless behavior over the last couple of months is undeniably
frustrating, a very robust wall of worry is being built. Eventually, gold
will begin to climb it."

"Gold traders' increasing impatience has led even more of them to throw
in the towel than before -- which, in turn, is why contrarians are confident
that gold's next major move is most likely up...

When I wrote about gold sentiment two months ago, this average stood at
16.7%. Today, in contrast, it is at minus 14.8%, which means that the average
gold timer is now allocating about a seventh of his gold-oriented portfolio
to shorting the market. That's a relatively aggressive bet on lower gold
prices...

In fact, except for a couple of days in late March when the HGNSI dropped
marginally lower to minus 15.7%, its current level is the lowest it's been
since March 2009, more than three years ago.

And that's really quite amazing, given that gold at that time was trading
only slightly above $900 an ounce.

In other words, gold traders today are just as pessimistic about gold's
prospects as they were when gold was trading for more than $700 less. No
wonder contrarians are impressed by the wall of worry that exists in the
gold arena these days."

All of the above illustrates why we proceed in a manner that emphasizes risk
management and survival in anticipation of the moment when this massive wall
breaks down in the gold stock sector and in the metal itself. The correction
has gone on longer and in the gold stocks' case, deeper than I originally
anticipated, but is right in line with the short-term parameters set when
HUI broke down from the early 2012 uptrend (Bear Flag to resistance at 555)
and then, the 475 'neckline'.

This proves why it is always a good idea to manage risk and keep cash for
opportunity. The 'Wall of Worry' will probably prove bullish ultimately, but
it will only feel that way to patient individual players who are positioned
for it.

Things have been tough in this sector since the mini mania blew out last
year, first in silver and then in gold's euro crisis momentum. That was
last year and this is the hangover. Either the bull market has ended (I
see no evidence of that) or this intermediate swing is a rare opportunity
point in the precious metals. There is no middle ground. NFTRH will
continue to manage risk with an eye toward opportunity and I would be delighted
to have you would join me for weekly precious metals market management,
along with other areas of interest anticipated to provide opportunity in
the future.

Disclaimer:http://www.nftrh.com does
not recommend that any trading or investment positions be taken based on views
expressed on this site. If you speculate or invest it is suggested that you
consult a financial advisor qualified in your area of interest.